Transcription
Last week, China announced that its trade surplus had reached over $1 trillion in the first 11 months of this year. This statistic was cheered by China bulls as yet further proof of China's industrial dominance and the impetence of Trump's tariffs, but has since provoked some real anxiety amongst China's trade partners. Emanuel Macron, for instance, penned a piece in the Financial Times earlier this week, arguing that China must address its internal imbalances or the EU would be forced to adopt more protectionist measures. While Mexico has since announced tariffs of up to 50% on a whole range of Chinese goods, adding to the long list of countries that have now imposed restrictions on Chinese exports, which include not just Western countries like the US and Canada, but also developing countries like Indonesia, Turkey, and Brazil. So, in this video, we thought we'd explain why China's massive surplus is proving controversial with its trading partners and how it might be fixed.
Who is the most influential person in the world? Well, last year the TLDDR audience ranked Donald Trump as number one with these people all landing in the top 10. But do you agree? Click the link in the description to cast your vote for our 2026 ranking.
Now, to understand why China's surplus has irritated its trading partners, we need to do a bit of macroeconomics 101. The key thing to understand here is that persistent trade imbalances shouldn't really happen, at least according to orthodox economics. After all, when you export loads of stuff, this creates demand for your currency, which should thus appreciate and allow you to afford more imports. This is not to say that we shouldn't expect bilateral trade imbalances, i.e. imbalances between countries and individual trading partners. You can very easily imagine a world where country A runs a surplus with country B, which runs a surplus with country C, which runs a surplus with country A. But each country's overall trade account should be balanced. In the context of this hypothetical, country A's surplus with country B should roughly equal its deficit with country C.
In China's case, for instance, when China exports lots of stuff, you'd expect Chinese households to then use this hard-earned foreign currency to import stuff from the rest of the world. Now, at this point, the China bulls in our audience might retort, "What if China just makes the best stuff, and Chinese households just don't want to import foreign-made alternatives?" Well, fine. But if China isn't importing, but is continuing to export, orthodox economics would predict this would just continually push up the value of the yuan until foreign imports eventually become competitive and the trade account would then balance.
This speaks to a commonplace confusion about trade balances, apparently shared by politicians and journalists alike, that trade surpluses reflect industrial strength and trade deficits reflect industrial weakness. Even if it's true that Chinese industry is great and the world thus wants lots of Chinese exports in a functioning economic system, this should just mean that China can afford a lot of imports. In other words, these exports should be used to pay for imports that make Chinese households better off, like nice French food or nice Italian handbags. Otherwise, you're just exporting for the sake of it. Rather, trade surpluses usually suggest that a country isn't able to get its hands on as many imports as it should be able to. And this is the main reason that China's trade partners are getting a bit irritated. It's not just that Chinese manufacturing exports are hyper-competitive, although this is obviously causing some anxiety in places like the German car industry. Rather, it's that China apparently doesn't want anything from the rest of the world. It would be fine if the rest of the world bought lots of Chinese stuff and China bought an equivalent amount from the rest of the world as orthodox economics would predict.
This concern has become particularly acute for three reasons. First, and most obviously, the fact that China's surpluses are bigger than ever. While China's surpluses haven't changed that much as a percentage of GDP and are actually smaller than those of other chronic surplus countries like Japan and Germany, the growth in the size of the Chinese economy overall has given way to record-breaking surpluses. This problem has become particularly acute in the past 5 years or so. Since the pandemic, China's import volumes have essentially remained flat while its exports have surged.
Second, China has moved up the value chain. Before other countries were less fussed about Chinese surpluses because they knew there were still gaps in the value chain where they could sell their stuff to China, even if China didn't import as much as it exports. Now, however, China produces everything from cheap components up to high-end manufacturing goods like electric vehicles. This has provoked some anxiety amongst China's trading partners who can no longer really see what they might export to China.
Third, and finally, these surpluses look more and more like a deliberate policy choice. Since at least 2015, when Xi Jinping revealed his "Made in China" policy, the CCP have been explicitly pursuing a policy of economic self-sufficiency, which involves reducing their reliance on foreign imports. The CCP has also continued to undervalue China's currency, the yuan, which effectively prevents Chinese households from importing as much stuff as they should be able to. And Xi has explicitly resisted calls from the IMF and elsewhere to boost domestic demand within China by doing stuff like giving cash to Chinese households or improving China's safety net, which would give households more confidence to spend. This is despite the fact that boosting domestic demand would help address China's deflationary crisis, because more spending means higher prices. For context, inflation in China has been hovering around zero for most of the past year, sparking fears that China could drop into a Japan-style deflationary crisis.
Now, of course, it's important not to overstate all this. While lots of China's trade partners, especially in Europe, are indeed anxious about China's surpluses, others, especially poorer trading partners in the global south who never really expected to export that much to China in the first place, don't really care about trade balances as long as they get cheap, high-quality Chinese stuff. Pakistan is a great example. Super cheap Chinese solar panels have enabled a transformative electricity revolution in a country that has suffered from recurrent energy crises. Nonetheless, global anxieties about China's trade practices only seem to be growing. So, it would probably be a good idea to address them sooner rather than later.
So, what happens next? Well, interestingly, in the past couple of weeks, we've seen a change in tone. And the CCP are apparently showing some interest in boosting domestic demand. Since October, Chinese policymakers have been talking about "investing in the Chinese people," which has been widely interpreted as a euphemism for boosting domestic demand. This will come as a welcome relief to many of China's trade partners, especially in Europe. But this won't be straightforward, and it's worth noting that the CCP's previous efforts to boost domestic demand have generally fallen short. A more permanent fix would probably require multilateral cooperation between both surplus and deficit countries, which feels unlikely at the moment.
Now, as a viewer of TLDDR News, we know that you're a details person. So, you probably check at least a half dozen reviews before forming an opinion or making a big ticket purchase. You'd read the nutritional information on cereal boxes. You even read the terms and conditions for some app you almost downloaded. So, when you're giving to charity, why should this be any different?
Well, today's sponsor, GiveWell, provides you with those details as an independent resource for rigorous, transparent research about great giving opportunities. For example, their recent analysis of the effect of cash transfers in poor regions of Africa contains over 300 footnotes, which might satisfy even the most meticulous readers. That's because GiveWell has spent 18 years researching global health and poverty alleviation and only directs funding to the highest impact opportunities they've found. These are things like preventative medication for malaria. It costs about $7 to provide a child with malaria treatment through the high malaria season. These treatments can reduce the number of malaria infections and with enough treatments also save a life in expectation.
Over 150,000 donors have already trusted GiveWell to direct more than $2.5 billion. Rigorous evidence suggests that these donations will save over 300,000 lives and improve the lives of millions more. You can find all of their research and recommendations on their site for free. And thanks to the donors who chose to sponsor their research, GiveWell doesn't take a cut from your tax-deductible donation to their recommended fund. And if this is your first gift through GiveWell, you can even have your donation matched up to $100 before the end of the year, as long as matching funds last. To do so, go to givewell.org and pick YouTube and enter tlddrnews at checkout so they know you heard about GiveWell from us. Again, that's givewell.org to donate or find out more.